California health care entities can expect increased scrutiny of future mergers, acquisitions, and other transactions following the passage of the California Health Care Quality and Affordability Act (HCQAA). Effective April 1, 2024, a newly minted regulatory agency will review certain California health care deals for their impact on market competition and health care prices prior to closing. Any health care entity considering a significant transaction in California should seek legal advice before attempting to navigate this new, complex, and potentially costly regulatory regime.
The HCQAA – signed into law on June 20, 2022 as part of Senate Bill No. 184 – establishes the Office of Health Care Affordability ( OHCA). OHCA is tasked with combatting rising health care costs and promoting competition in the California health care market. Included in OHCA’s broad grant of authority is the power to investigate anti-competitive consolidation among health care entities, which the California legislature has identified as a primary driver of escalating health care costs in the state.
To this end, California health care entities will be required to provide ninety days prior written notice to OHCA of any proposed merger, acquisition, corporate affiliation, or other transaction that will result in a material change to the ownership, operations, or governance structure of a health care entity. Health care entities that are subject to this obligation include payors, providers, and fully integrated delivery systems. A “material change” is defined as any change in ownership, operations, or governance for a health care entity, involving a material amount of assets of a health care entity. Transactions subject to this obligation include transactions that occur on or after April 1, 2024 that: (a) involve the sale, transfer, lease, exchange, option, encumbrance, conveyance or other dispensation of a material amount of the assets of a health care entity; or (b) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities. There are several types of transactions that do not require notice, including transactions that are subject to comparable regulatory oversight from the Department of Insurance or Department of Managed Health Care, certain nonprofit organization transactions, and agreements or transactions where a county is taking control of an entity.
If, based on the written notice, OHCA determines that the transaction threatens market competition or health care affordability, it will conduct a “cost and market impact review”, as described in further detail below. OHCA will then publish its findings in a publicly-available report detailing the transaction’s anticipated impact on the health care market. It may also refer its findings to the Attorney General for further review of any OHCA identified anticompetitive behavior discovered during the review process.
The specifics of OHCA review and reporting process will be implemented are pending further rulemaking. But based on the timelines, investigatory powers, and potential costs set forth in the HCQAA, OHCA cost and impact reviews are likely to play a significant role in health care transactions going forward.
Below is an estimated timeline of the OHCA review process:
Without more concrete guidance from OHCA regarding timelines for the review and reporting phases, it is difficult to predict exactly how long the process may take. But given the complexity of the subject matter and the breadth of OHCA’s investigatory authority, it could be several months or even a year from the time that a notice of material change is given to the publication of the final report when OHCA decides to perform a cost and market impact review.
This change in California follows recent steps taken in a number of other states to regulate health care transactions, including Oregon, Nevada and Massachusetts. Foley is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, or to our Health Care Practice Group with any questions.